The Importance of Cash Flow Planning for Closely Held Businesses

• Date: 01 November 2015
• DOI: http://doi.org/10.1002/jcaf.22098
• Published date: 01 November 2015
• Author: Caroline D. Strobel

41

© 2015 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22098

f

e

a

t

u

r

e

a

r

t

i

c

l

e

The Importance of Cash Flow

Planning for Closely Held Businesses

Caroline D. Strobel

Estate planning

for owners of

closely held

businesses involves a

number of difficult

decisions, not the least

of which is determin-

ing the ability of the

business to generate

sufficient cash flow

to cover estate taxes

and generate sufficient

working capital to

maintain and continue

to grow the business. Closely

held businesses can be relatively

small, involving the owner and a

few employees, or they can be a

business of significant sizewith

multiple owners and a customer

base that may even be interna-

tional in scope.

A recently published study

by the accounting firm Baker

Tilly found that four out of

five family-owned businesses

in the United States were not

ready for succession. Several of

the main challenges that they

found facing a business are

being ready for transition or

sale, and ensuring that the busi-

ness has the financial capacity

to support both retirement

and the next generation. They

noted that having a succession

plan in place can help ensure

that the transfer of knowledge,

skills, and wealth is taken into

account to maintain business

continuity and to preserve the

capital value of the business.

FIRST DECISIONS

The most basic decision to

be made is whether or not the

business can or should continue

after the retirement or death

of the owner(s). An assessment

needs to be made as to whether

a family member is ready and

able to take over management

of the business. A number of

factors need to be

considered. The first

and most impor-

tant one is whether

the family member

really wants to work

in and manage the

particular business.

Many times, family

members want no

part in the business,

are not capable of

running the busi-

ness, or would prefer

starting their own different

business. If a family mem-

ber has been involved in the

business and has shown him/

herself to be capable of run-

ning the business, then there

is no problem as long as cash

flows are going to be adequate

to cover estate taxes when

the business is passed on to a

younger generation. However,

the introduction of a sibling

as the new leader of the busi-

ness inevitably creates new cash

flow issues. First,lenders may

curtail lending and/or require

more strenuous terms due to a

less experienced individual at

the helm of the business. Sib-

lings or, even worse, spouses

Cash flow planning for owners of closely held

businesses is an important component to the

ultimate success and continuation of that busi-

ness. This article presents a number of important

planning issues that require careful consideration

concerning the adequacy of cash flow genera-

tion. Looking ahead and planning for the smooth

transition of a business to new management is

necessary for the financial well-being of a family.

© 2015 Wiley Periodicals, Inc.

Commissioned